The real reason why energy prices are spiralling out of control

LIKE most readers, I have had my run-ins with energy companies. One especially pushy door to door salesperson once tried to forcefully convince me that I needed to sign up to his firm because I had just moved into a new home. Fortunately, I wasn’t naïve enough to succumb to his lies but many others were fooled; the unpleasant practice of sending cold-callers to knock on people’s doors has fortunately now been ditched by most of the industry. More recently, I was forced to part company with one supplier after the member of staff who showed up unannounced at my house turned out to be as rude as he was incompetent.

We’ve all been there at one point or another. Like many large consumer-facing UK companies, energy firms’ customer service remains woeful. It’s a nightmare trying to get through to helplines; and most of us know of people who have been harassed for bills that were in fact incurred by previous owners or tenants and wrongly sent nasty letters threatening bailiffs.

But while firms urgently need to get their act together on all of these issues, it is important to dispassionately analyse what is driving up energy prices and not to allow irritation at this widespread corporate stupidity to cloud our judgment. British Gas’s price hike yesterday was primarily caused by forces out of its own control – forces that politicians, not businesses, are directly responsible for.

The biggest issue is that the coalition and the previous Labour government have embraced decarbonisation and loaded the cost of green energy as well as elements of social policy onto consumers. Instead of coming out of general taxation, these are now passed on as higher bills. It’s a neat trick: the consumer blames the energy company, not the politicians; and political parties can claim to keep the official tax burden low even though they have introduced stealth, off balance sheet levies on an unsuspecting public.

Taking an average dual energy bill, policy and regulation costs will increase from 8 per cent (£75) of the total bill in 2007 to 22 per cent (or £329) by 2020, a massive 338 per cent rise. The cost of updating the network infrastructure to allow it to function with lower carbon and more distributed generation technologies will add an extra £114 per bill by 2020 – a 124 per cent increase on 2007. The cost of rolling out of smart meters will boost supplier costs by about £24 .

Examining the policy and regulation costs in more detail, the price of supporting low carbon technologies will increase from £12 in 2007 to £82 on each and every bill by 2020. The cost of carbon will jump by £45; spending incurred for improving energy efficiency will add £88 to the average bill by 2020 (up from £17 in 2007).

Most people remain supportive of green policies – but that is because they have never been told what the real costs are, and that it is the poor and those who spend the greatest share of their incomes on energy that are being hit hardest. These figures certainly show that appeasing middle class consciences comes at great cost.

Given that the coalition seems unwilling to change any of this, what else can be done? Well, if you don’t like your energy company, change supplier. Not enough people vote with their feet. This isn’t a panacea because the green levies are hitting the whole industry. But some companies are more efficient than others – and the industry’s administrative and operating costs could fall further if companies faced greater competition and an increased chance of losing customers. Prices could thus go up less quickly, while still maintaining the current levels of profit margins of around 5 per cent that are vital to incentivise investors. The government also needs to make it easier for new entrants to enter the market.

Ultimately, however, unless green policy also changes, prices will keep on going up – and up, and up.